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SARSEP contribution limits


Guest bkp
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Our C Corporation has had a SARSEP since 1990. We use the IRS model plan. One of our "non-key" employee wants to make additional 2003 elective deferrals (in addition to the $2000 permitted catch up) which, when added to the employer's contribution, will exceed the 25% maximum 'excludible' amount. However, even with the additional contributions, her deferrals would be less than the $12,000 limit, and total contributions would be less than 25% of GROSS compensation. She points to the current IRS SARSEP webpage (and other non-IRS publications) which says that "contributions to each employee's account are limited to the lesser of $40,000 or 25% of "pay". I point to the 5305A-SEP (March 2002 version) which says "deferral limit is 25% of compensation (minus any empoyer SEP contributions, including elective deferrals)". I am seeking to verify that this 5305A-SEP version hasn't been superceded by new rules that I'm not aware of upon which the IRS web page reference to SARSEP contribution limits is based. Thank you.

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Once the 25 percent exclusion allowance is determined (based on includible compensation) the catch up amount may be contributed in addition to the 25 percent exclusion allowance. [iRC 414(v)]

E.g. Frank earns $60,000. From that amount he defers $14,000. The 25 percent exclusion limit is based on $48,000 ($60,000 - $12,000) and equals $12,000 (plus catch up contributions). See "Section 402(g) Limit" on page 3 of Form 5305A-SEP. Assuming no employer contributions are made Frank may defer the entire $14,000.

Assuming Franks compensation were higher. He may not contribute elective amounts beyond his ADP limit (assumed to be okay here-he's a N-Key employee) plus the catch-up amount. Once the ADP limit is reached (or employer contributions cause elective amounts to be reduced), then elective amounts above that amount (up to $2,000 for 2003) may be treated as catch-up contributions.

Here, the only way for a non-key employee to have an catch-up contribution would to be to defer (make an elective contributuion) of more than $12,000.

An employee can not bring there account up to the $40,000/$42,000 limit by making additional contributiions beyond normal allowable elective plus catch-up.

Note: although the 100 pecent limnit can also be exceeded by catch-up contributions, the exclusion limit is always lower.

The language in the prototype regarding the term "compensation" is less than clear because it tries to prevent allocations (although deductible) from exceeding the IRC 402(h) exclusion limit.

Publication 560 states that allocation compensation is not reduced by elective contributions, but that an employer can choose to exclude elective amounts from the definition of comnpensation. Clearly, the IRS did not write this to for the handfull of individuallly designed SEPs (that might exist). It must be assumed that it applies to IRS model and prototype plans. Nonetheless, the 25 percent exclusion limit is based on the includible compensation.

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